What does anti-selection refer to in insurance?

Anti-selection refers specifically to a scenario in the insurance industry where individuals who are considered high-risk or have poor health are more likely to seek out insurance coverage. This phenomenon occurs because these individuals are more aware of their health risks and may feel an urgent need to protect themselves financially against potential future healthcare costs. As a result, those who are in poorer health may have a higher propensity to purchase insurance compared to those who are healthier.

This creates an imbalance for the insurance company, as they are likely to attract a disproportionate number of policyholders who are more likely to make claims. This can lead to higher costs for the insurer if not managed properly, since the insurer may end up covering more claims than anticipated based on the overall risk pool. Understanding anti-selection is crucial for insurers as it highlights the need for careful underwriting and pricing strategies to mitigate the risks associated with offering coverage to individuals who may have a higher likelihood of filing claims.